* From Moody’s. ..
Moody’s has issued a short comment (attached) regarding Governor Rauner’s initial proposal to close a projected 21% budget gap for the State of Illinois (rated A3/negative outlook) in the coming fiscal year. Rather than raising revenue, the proposed budget would cut pensions and employee health insurance spending, local government subsidies, Medicaid and other services, and rely on spending restraint that, given political and legal challenges, will prove hard to implement. Many of the Republican governor’s proposals, we believe, will face strong opposition from Democrats, who retain control over both legislative chambers. To the extent they are enacted, however, the funding reductions would shift fiscal pressure from the state to local units of government, public universities, healthcare providers and other entities that rely on state funding.
The proposed funding reductions to local governments, public universities and healthcare providers would all require approval in the legislature, where Democrats control both chambers by veto-proof majorities. This political landscape may make it difficult to enact even a few key elements of the governor’s proposal, much less the entire plan to achieve balance without raising revenues. The governor has indicated a willingness to discuss tax reform and increasing revenue by broadening the sales tax base to include services.
Under the fiscal 2016 budget proposal, local governments would see their state-shared income tax distributions cut in half, to $600 million. Among Moody’s-rated Illinois cities, income tax receipts accounted for a median 10% percent of operating revenues in fiscal 2013. The ability of local governments to offset a cut in income taxes with other tax increases varies widely. While home-rule cities have wide revenue-raising flexibility, some non-home-rule municipalities are subject to tax caps under the Illinois Property Tax Extension Law Limit.
Of the proposed fiscal 2016 savings, almost half, or $2.9 billion, would come from retirement benefit cuts. These consist mainly of pension reforms that Rauner’s team believes are more likely to withstand legal challenges than the state’s 2013 reforms now being challenged in court.